Q3 2021 Paccar Inc Earnings Call

Good morning, and welcome to Patkars third quarter 2021 earnings conference call all lines will be in a listen only mode until the question and answer session. Today's call is being recorded and if anyone has an objection. They should disconnect. At this time I would now like to introduce Mr. Ken Hastings Patkars director of Investor Relations.

Mr. Hastings. Please go ahead.

Good morning, we would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, <unk> director of Investor Relations and.

Joining me. This morning morning are Preston Feight, Chief Executive Officer, Harry Skippers, President and Chief Financial Officer, and Michael Barkley Senior Vice President and controller.

As with prior conference calls, we ask that any members of the media on the line participate participate in a listen only mode.

Certain information presented today will be forward looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results.

For additional information please see our SEC filings and the Investor Relations page of <unk> Dot com.

I would now like to introduce Preston Feight.

Good morning, Thank you all for joining the call.

Skippers, Michael Barkley and I will update you on our good third quarter results and business highlights.

I appreciate our outstanding employees around the world, we're managing through the supply base constraints to deliver the highest quality trucks.

Parts and financial services solutions to our customers.

And I'd also like to thank Packers dealers and suppliers for their contributions and support during these dynamic times.

Patkars good quarterly revenues and net income in the third quarter reflect sales and profit records at pack, our parts and Peck our financial services.

Okay.

The economies in freight markets continue to be robust in all of Packers geographic markets.

Patkars, having a tremendous year of new product introductions.

And demand for the new Kenworth, Peterbilt and <unk> trucks is excellent.

Our third quarter sales and financial services revenues were $5 $2 billion and third.

Net income was $378 million.

Pack, our parts achieved record quarterly revenues of $1 $26 billion and record pretax profits of $281 million.

Packer financial achieved record pre tax income of $120 million.

The record setting parts and financial services results illustrate the strength of the <unk> businesses.

With the strong order backlogs growth in the truck divisions will accelerate as the supply of semiconductors improves.

We estimate class eight industry retail sales in the U S and Canada to be in a range of 230 to 250000 trucks. This year.

Peterbilt and Kenworth have achieved 29, 6% market share through September.

Although build is still expected to be limited by semiconductor supply in the fourth quarter. The good news is that we're starting to see improvements in the supply chain.

We forecast the 2022 U S and Canadian class eight truck market to be in the range of 250 to 290000 vehicles.

In Europe. This year's truck industry registrations in the above 16 tonne market are estimated to be in a range of 260 to 280000 vehicles.

The off year to date market share is 15, 8%.

The 2022 market is expected to be in the range of 260 to 300000 trucks.

The South American above 16 tonne market is projected to be in a range of 120 to 130000 trucks. This year.

<unk> Brazil's above 16 tonne market share through September was five 6%.

The South American above 16 tonne truck market is estimated to be in a range of 130 to 140000 trucks next year.

The new Kenworth <unk> hundred 80, and Peterbilt 579 trucks that began production in the third quarter are being well received by our customers.

These trucks feature new styling Configurable digital digital instrumentation advanced aerodynamics distinctive led forward lighting and they provide up to 7% greater fuel efficiency.

The new Kenworth and Peterbilt medium duty trucks that also began production in the third quarter provide features that customers appreciate.

As a wider cab with three person seating lower cap heights for easier entry and exit and new digital instrumentation.

Exciting new Das, except X gene and X gene plus lineup feature luxurious in tears and beautiful exteriors that provide 10% greater fuel efficiency.

The new <unk> offers unsurpassed performance and value.

<unk> is the first truck manufacturer in the industry, who have taken full advantage of Europe's new regulations governing truck design.

And the new dump trucks began production earlier this month.

All of these new trucks position pack are very well for the future.

Packer leaves the industry was seven battery electric vehicle models now available.

Peterbilt and <unk> have orders for several hundred zero emissions vehicles and have 90 trucks operating with customers.

These include Kenworth <unk> hundred 80 fuel cell trucks peterbilt.

Peterbilt battery electric model 570, nines and das medium duty battery electric trucks.

Patkars advanced autonomous truck program by working with these partners Aurora and Fedex to launch a commercial pilot of autonomous vehicles into line haul operations.

Pack, our trucks are operating autonomy sleep, but the backup driver for safety as they haul freight on 500 mile route between Dallas and Houston.

<unk> launched an advanced global connected truck platform.

Customers will benefit from the systems enhanced truck data security.

Advanced over the air software updates elimination of the need for third party hardware modules and an open platform that supports existing fleet management systems.

<unk>, new proprietary connect system increases customer value.

Increases patkars recurring revenue and as part of <unk> digital transformation.

We're pleased to share that <unk> was recently recognized as a 2021 top company for women to work for in transportation by the women in trucking Association.

We were honored for excellent working environment and company culture that supports gender diversity.

<unk> committed to hiring and promoting the most talented people in the world and we know that the best people.

At present, the diversity present in the global community.

<unk> continues to be an environmental leader.

Working with the science based targets initiative and is committed to 2030 carbon reduction goals.

Our earned the CDP climate change score of a minus placing <unk> in the top 15% over 9500 companies that published reports to the CDP.

100% of Packers manufacturing locations globally have environmental management programs certified under ISO 14001.

Perry Skippers will now provide an update on pack, our parts pack or financial services and other business highlights. Thank you Carey over to you.

Thanks Preston.

Kenworth, Peterbilt and Dove deliver 32800 trucks in the third quarter.

With truck parts and other gross margins.

11, 8%.

Third quarter volumes and margins it looks like manufacturing inefficiencies.

Associated with limited microchip supplies.

Depending on the supply of materials.

Fourth quarter took our global truck deliveries should increase into the low 40 thousands.

With gross margins improving to.

To approximately 12, 5%.

Customer demand is strong enough kenworth and peterbilt are well positioned for sales growth and margin expansion.

As the new truck models are not only production.

When semiconductor vendor supply issues are resolved.

Becker parts had another outstanding quarter, achieving record revenues of $1 billion and $260 million.

24% compared to the third quarter of last year.

Parts pretax profits.

$281 million.

34% from last year.

<unk> benefited from strong freight demand.

Mark utilization.

World Class supply chain management and logistics.

Increased distribution capacity.

The first nine months of this year overall part sales increased 28%.

With e-commerce parts sales increasing 37%.

Blackrock continues to invest in its parts business.

And is building a new distribution center in Louisville, Kentucky that will open next year.

We currently expect fourth quarter parts sales to be similar to the strong third quarter.

Paccar financial services earned record pretax income of $120 million.

Reflecting strong portfolio performance.

Robust used truck demand.

We expect fourth quarter financial results to be aligned with the excellent third quarter.

Becker financial is increasing its retail used truck center capacity worldwide, which enhances used truck margins.

The latest spectra financial used truck facility is under construction imagery, Spain.

Kenworth and peterbilt truck resale values deliver at 10% to 20% premium over our competitive strengths.

Vigorous invested $7 3 billion in new vehicle programs in house facilities, and new technologies during the past decade.

This includes the investment of.

$1 billion put a new Duff truck range and its expanded factories.

Capital expenditures for 2021.

Projected to be $525 million to $550 million.

Next year, we plan to invest $425 million to $475 million capital projects.

As we've just completed the launch of an exciting new truck platforms.

Research and development expenses are estimated to be $320 million to $330 million this year.

And at least $350 million to $400 million next year.

Next year's increased R&D spending will support our clean diesel.

Emissions autonomy and connected truck programs.

These programs along with the strong performance of parts and financial services I'm not sure.

Ongoing success.

Thank you we'd be pleased to answer your questions.

At this time as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Your first question will come from Stephen Volkmann with Jefferies. Please proceed with your question.

Hello, Good morning out there guys.

I'm, hoping to talk a little bit about just the kind of impact of the quarter I guess, the pre announcement that you.

<unk> put out a few weeks ago talked about 7000 trucks that you were unable to ship I assume that means those trucks are largely completed and awaiting whatever part would allow you to ship them is that correct.

So that's partially correct is what I'd say, Stephen the way I'd look at it is through the course of the third quarter supply based constraints remained that caused us to have 7000 fewer deliveries from us.

That was a combination of build rate adjustments as well as trucks that are almost complete as you referenced them. So that's what put us in that position. So right now with the 32800 trucks in the third quarter. There is about 10000 trucks offline.

That's how you match that up.

Okay, and then I assume as we go forward and ultimately you will ship those trucks when the parts are available.

In whatever quarter that happens then you will have much better absorption in fact better than normal absorption I guess in your margin should be kind of higher than normal in my thinking about that right I.

I would think about it this way is that what we think is with the trucks that are offline. Those are just missing a component or two or three and so as those trucks delivered that's going to be good for us in terms of Guinea.

Getting the trucks to the customers. That's the most important thing and that's where our focus really was in the third quarter is to get as many trucks prepared as we could.

So we will see that improve market share positions et cetera around the world. We also think that as we get additional supply of semiconductors, then that will allow us to go up and build rate and we think those things will happen concurrently with one another.

<unk>.

But theres not a big absorption impact one way or the other from from building, but not shipping.

So the.

Preston mentioned, Steve those trucks were largely completed in prior quarters. So that's what we.

And Kurt overhead and labor and the absorption as well.

So once those tricks deliberate who'll be caught the margin on the truck, but not the absorption anymore.

Understood. Okay, and then the final one and I'll pass it on just was given all of your product launches here heavy duty medium duty dos.

Does that.

Sort of imply there was more than normal startup costs associated with these launches in the quarter.

Does yeah in the course of the third quarter, there was more than normal startup and that's that's.

That's a percentage of what was going on as well.

And I think that what we're seeing now is those.

New 579, new <unk> medium duty products.

Starting to see them on the road.

Given a lot of positive feedback from our customers. So the team did a great job on those the new Dol just went into production.

It's just.

Fantastic.

Okay. Thank you I'll pass it on alright.

Your next question will come from the line of Ann Duignan with Jpmorgan. Please proceed with your question.

Okay.

Yes, good afternoon.

Everybody maybe.

Maybe just.

As we think about gross margins going into 2022, and the back of kind of Steve's question.

And I totally appreciate that.

Trucks that are offline you got the absorption already so you won't get the margin when you record the sales, but as you roll into 2022 and you look at.

The potential for gross margins could you talk about some of the pluses and minuses that we should contemplate when we're looking at our modeling and pricing.

In backlog inhibition.

Inefficiencies you incurred this quarter because of the startup.

And our components again, if you could quantify any of those that will be helpful. So that we can think more carefully about our gross margin assumptions for 2022. Thank you.

<unk> so as we think about the fourth quarter, what I mentioned in the commentary is that we have.

Starting to see some.

Good news working with the supply base our teams here in purchasing materials operations have done just a fantastic job, where can suppliers suppliers working with us and through those strategic partnerships. We've now started to come up with them either re engineered solutions or alternate chips or brokered chips that analysis allows us to start to.

I'll cover some of the trucks in the fourth quarter.

And we think that that will continue is likely to continue.

And then as we get into 2022 as we have steady production.

Which is what we would anticipate albeit at probably some still constrained level that will allow our margins to improve to more normal.

High margins.

Can you talk about pricing specifically.

Our new models can you talk about that.

Material inflation versus.

And some supply chain constraints, you've had and then.

Anticipating.

<unk> retail sales next year as you rebuild.

Dealer inventories, maybe you could just remind us what your dealer inventories were at the end of the quarter.

Sure and first of all we had price realization of 4% in the third quarter and so that has matched up with the materials. We think into 2022, we should have continued price realization for the great New products I mean, if you just think about.

The kind of product performance are delivering for our customers.

We're seeing that so that's good news for US and then as you mentioned our inventory is about one four months compared to the industry at one 9% or two months, which allows us to also think that we will build more and really 2022 as we look at it will be probably constrained only by supply of components.

Certainly true for the first half.

Okay I'll leave it there and get back in line. Thank you I appreciate the color alright good.

Your next question will come from the line of David Raso with Evercore. Please proceed with your question Hi.

Hi, Thank you to continue the conversation on pricing when you just said continued price realization.

Should we expect that to mean running above the 4% that you got in the third quarter.

Maybe try to think through how used prices. The strength there is influencing how you're thinking about pricing for for 'twenty two.

As Chris mentioned, we have increased prices on average 4% in the third quarter David.

If we look into the fourth quarter of next year that is obviously going to continue.

We're going to cover material cost increases and price for those.

Hopefully a little bit more in a strong market that we're in today.

And then when it comes to the supply chain improvement is there anything that you're seeing that suggest it looks like the fourth quarter. There was some modest improvement the deliveries.

Step up significantly because the you have a lot of trucks that are just waiting for a few parts, but is there anything you're seeing about <unk> or <unk>, where you can give us some sense of magnitude of the improvement in the supply chain not necessarily saying that it's a hockey stick out there, but just a better sense. If you can expand upon a little bit that comment about seeing in them.

Proving supply chain.

Yes, I think this week as we look at it.

Really been just recently that we've seen the stabilization and the supply basically semiconductors from the work. The teams are doing and so thats. The goodness that we see in this work with our second third and fourth tier suppliers and we have good supply base and they're all communicating really well for US right now that we would expect.

There will be gradual and steady improvement rather than a hockey stick as you mentioned, how far that goes and where that bounds out. It. We don't know that we'll have to see how that looks in the course of the year, which actually could be.

Play into a good market for next year and a good market in the year after that so that's the positives there and then just to add onto what Harry was talking about in price realization of one of the things that we do see with the new dump trucks, we have over 10000 orders for the new Das in Europe, and as we mentioned briefly it's the only truck in Europe that meets the new regulations.

Truck design only truck and customers are amazingly excited about it and it can make a big difference for us So that's a positive.

That's helpful. So just to wrap up on the on the sequential side. It feels like these low 40000 deliveries and for Q.

Even though you do have a lot of trucks, partially built that enables maybe a quicker delivery than having to build from scratch can we take the supply chain comments as base case builds increase sequentially from this fourth quarter level, just as we think through the beginning of next year.

That's our hope right now since we would hope to have happen here even.

A lot of it will depend on the supply base David.

Our teams have done an amazing job and redesigning modules components to work with alternative chips and other solutions that will do to semiconductor situation is still <unk>.

Great.

We find some alternative solutions to keep production going with good solutions.

And I think that.

Supports our optimism a little bit I.

I appreciate that just because if you do do that and you run the rest of the year out that way. It looks like your deliveries are running ahead of the initial 22 industry guidance is and I guess that goes back to your comment it looks like you'll build more than the industry sales next year I'm, just kind of trying to square that circle, a little bit so.

That's right.

That's really one of the things we focused on in the course of the quarter or two is there is a tremendous amount of customer demand for the kenworth peterbilt and <unk> trucks out there.

And so our focus has been around getting as many prepared for delivery as we can building and.

Josh just shy of component to satisfy that market demand for these great trucks alright.

Alright, Thank you very much I appreciate it.

Your next question will come from the line of Steven Fisher with UBS. Please proceed with your question.

Great. Thanks, Good morning, guys.

It seems like you'd be delivering.

Some of your backlog that you have today you are taking orders on 2021 models.

Bring them into 2022, so I'm just curious.

When will your deliveries switchover from 'twenty, one model years to 22 model years, and what impact will that have on pricing and margins.

Well as you know every time, there's a model year theres, an increase in and how that works and that will happen in the first part of 2022 and just the normal cadence.

The change in multi year is less relevant than the change from the old to the new models sort of new <unk>, the new T. $6 80, the new 579, new medium duty does have a much bigger impact of the multiyear change this year.

Yes.

Okay. That's helpful. And then just a bigger picture technology question, you've talked about the ramp on the EV market over the next few years, what's your expectation on industry and pack our ramp on autonomous vehicles by 2025 and with this relationship with.

With Aurora.

Well, we're in this test right now with Fedex and Aurora hauling freight is the first time, we've been participating in actual freight hauling exercise, we've got lots of trucks running around different autonomous.

Startups.

That's going well, but it's pretty early days and I think that making a prediction for how quick that market is going to develop.

Is going to depend on how so.

<unk> robust technology becomes and that's what we're learning about right now so.

I think we should be just patient to see how quickly develops and when it's really ready to scale.

Okay. Thanks, very much you bet.

Your next question will come from the line of Joel <unk> from BMO. Please proceed with your question.

How is it.

Hey, Joel.

I'm just wondering I'm following up on the end of Stephen's question, what what kind of barriers you think are out there.

More on the insurance side.

On the deal.

Or is it just having enough demand out there and I'd like to just some of that.

You guys have left.

Sure we had a really hard time hearing you there didn't come through very clear could you.

Tried to question again.

Yes, sorry, we just move to new office anyway.

What the.

What what Youre seeing is sort of like.

The road blocks to that Matt that technology adoption by 2025 as it is.

T R vials.

Files.

I think I got the Gist of your question is the roadblocks for implementation in 2025 autonomy and I would say that the technology is incredibly.

Involved and so if you think about the edge cases that exist, that's what's being sorted out right now most of the operation can be done.

Running down the highway but now it's about the edge cases of those unique boundary conditions. So we're working through those the other part of it is we are developing a proprietary Pat car autonomous vehicle platform, which has all the redundancies involved in it which is.

It should be ready in the next couple of years here and that will be a.

A.

Huge advantage for Packer and working with companies like Aurora like our partner Aurora, because it'll let us have this really robust platform to build upon.

And then we think probably the things that cause it to be constrain.

Constrained for 'twenty fiber again technology, there'll be a societal element to it as well.

And then company adoption.

So I think it'll start with.

Certain lanes and evolve from there.

Okay.

Alright got it.

Try one one more question.

To ask a little bit more instead of about the quarter I wanted to ask like on three to five year basis. The structure of the margins do you think like all these different things.

Autonomous and electric vehicles, and everything else, you're working on in and plus new product is enough to really drive your margins to new record levels or do you think that there might be some need to use some of your balance sheet to buy something or to expand into something that could.

Really drive those margins to a new higher level.

Yeah, Joel I, absolutely believe that the new products the autonomy that connected the electrification those efforts that we have on will drive our margins to very very high levels and I think then there is just other opportunities incremental to that so the future looks very good.

Okay. Thank you that's awesome.

Your next question will come from the line of Rob Wertheimer from Meles Research. Please proceed with your question.

Hello, everybody. Thank you.

Just a couple a couple of questions on you mentioned some of the supply chain things getting better I am a little bit curious on whether some of these are the only real holdup, maybe thats not too optimistic a way to phrase it whether youre just kind of out hustling I don't know if youre re programming like Tesla did or finding new sources.

And how long you sort of have some certainty on that and then more generally when when do you see the whole situation with somebody is getting better is that visible to you yet from your conversation with suppliers.

Well I think it's a matter of degrees I think our teams are doing as I mentioned before it's worth mentioning are doing a fantastic job of hustling as you put it. They are reengineering different chips are taking places, where maybe two chips, where required and reengineering them into require only one chip and we're working with.

Semiconductor manufacturers themselves in our second third fourth tier to come up with good solutions that are robust and high quality. So the teams did a fantastic job on that and I think that's why we're starting to see this improvement.

After all of their efforts.

And I would say that we see again, a gradual improvement over time as far as the final conclusion of it I think it's going to take some time so.

Gains next year are positive for us and then again that might make it for a very strong 2022 and <unk>.

Lead to a strong 2023.

Okay, perfect and then if I could also do a bigger picture one just early experience on your with your customers on electric and hydrogen.

When do you think those orders sort of start to convert to.

What I assume is testing orders to volume and then when you talk about the autonomous truck platform that you're developing.

For I guess for redundancy for sensors for everything else to go into assembly that comes out of it.

Content Slash price point for you and I Wonder if you have any thoughts on quantification. It seems like your future revenue curve is little bit better in the past as you layer in more technology I will stop there. Thank you alright.

Alright, so let's try to take the first one which is on order size of Evs. We have some orders that are not in the ones anymore, we're starting to see that shift into the tens and even hundreds for some of our orders where customers are saying have tried it I've been around you guys for a little while now I believe and what Youre doing and I think I can put tenant operation or more so that's kind of a transitional phase that we're in right now.

Realize it's still limited by the infrastructure requirements that are around out there some numbers of Chargers and putting that together. So it's really still that return to base kind of model adoption and it probably will be for a few years.

So that's a positive thing we're selling our Chargers Packer parts is doing good job of that our teams are doing a job working together with customers to make sure. They have the balance of truck and infrastructure. So it will just continue to progress over the coming years.

From an autonomous standpoint, yes, youre right that autonomous vehicle platform that you mentioned, we will have additional componentry on it it's a very tech solution.

<unk> will be the leader in that area. So that will be helpful to margin. We would also expect that services will grow autonomous vehicles, because now our dealers and their involvement will be significant as well and it should be good for the total business.

Thank you.

Right.

Your next question will come from the line of Chad Dillard from Bernstein. Please proceed with your question.

Hi, good morning, guys.

Hello.

So to what extent are you seeing share gains related to hear in the new product introductions for 2002 in your backlog.

Maybe you could talk about what your backlog of market share today is versus a year ago or even your current backlog and market share versus shipment market share I'm, just trying to get sense for.

To what extent you can outperform the broader industry and going into 'twenty two.

Yes, I would say that when we look at share. It's a really interesting time with the with build really industry build being constrained by the number of components that are out there.

And what I would say is that we feel like we're in good position right now with the share we have in Europe, and North America, Brazil, Australia.

And I would expect that we will see growth in chair because of the trucks that we've built and we will be delivering so it feels pretty positive looking forward, which would be great for the parts business and the finance company business as we look forward.

New truck models on top of that we will support market share growth as well three point here.

Great.

And then just on my calculations. It looks like you have about 140 basis point gap between actual gross margins this quarter.

And.

I was just hoping maybe you could kind of break down that that shortfall. So we can just model. It as we go into 'twenty two how much comes from just like absorption versus price cost versus logistics that'd be great. Thank you.

I'm, sorry, Chad I don't know.

Recognize that the numbers that you just quoted.

So I'm just looking at.

Sorry go ahead.

Yes.

Looking at the.

So the margins that you did the gross margins that you did compared to that to what you would do if you got your typical 20% Incrementals I got kind of a 140 basis points gap. So.

What I'm trying to bridge between.

Yes.

Incremental borrowings. It's typically you have been in that 50% to 20% range and nothing has changed about the companywide.

We continue to occur going forward.

Okay.

<unk>.

Like we said, we expect margins to improve in the fourth quarter to 12, 5% and as.

As we work through the semiconductor issues with a new truck models in place.

Margins should improve significantly going into next year.

I'll just add to what <unk> seen is probably more factors affecting margin than is typical so it makes it more complicated right. We mentioned the new product introductions.

The supply issues in the dynamics of that factoring into it.

Obviously pricing factoring in so it's but it does look really good with the new trucks and as we get stability, we feel like that the gains will be significant incrementals will be significant.

Okay. Thanks, I'll pass it on you bet.

Your next question will come from the line of Jerry Revich from Goldman Sachs. Please proceed with your question.

Yes, hi, good morning, and good afternoon, everyone Hey, Gerry.

I'm wondering if you could just talk about the.

Zero emissions vehicles.

Last quarter I think you had mentioned to date orders of 450 <unk> can you just give us an update on where that stands now and if you could just give us a flavor for what the regional mix looks like what the mix versus medium and heavy duty. It looks like if you don't mind.

Sure the orders continue to grow and I would suggest that.

As I mentioned, a little bit earlier, they are coming in I would say initially came in and the ones now they are coming in more like in the tens and even in the hundreds we've had some orders for.

From a standpoint of where they are geographically it's mixed I mean, Europe is seeing order intake for the trucks and build for the trucks and delivery to the customer same in North America.

It's medium duty and heavy duty split the key probably point to all of it is that its return to base applications. So weather heavy duty and medium duty. The adoption is going to be urban areas, where people are coming back and can plug into a charger at night, that's what we see the initial start to that.

And I think as we've articulated before.

<unk> orders and build will be in the hundreds in the coming year or two and then transition to the thousands pretty quickly in the next two to three years, let's say.

Terrific and then on the.

New product lineup.

Across the board.

Can you just talk about what report.

Can you talk about what proportion of your production do you expect to come from the new models in the fourth quarter and whats that mix ramp up looks like as we head into 2022, and if you are willing to quantify.

A liver labor hours reductions on new models typically im wondering if youre willing to quantify what that looks like here.

So I would say that in North America for the new trucks that they'll become a majority of the trucks in the fourth quarter and in Europe. We just launched this month for the new <unk> and so it'll be a minority of the trucks as we head into the next year, then it will grow into being roughly half of the trucks in.

Perry detail on the.

On the das builds for next year.

We will then this year of approximately 30% of our heavy trucks being the new model.

January will be similar.

I would say as of March it should be 50% and continue to grow from there.

And then to the second part of your question, where Youre thinking about the benefits of the trucks the trucks are.

Amazing as far as how they build we've got to get you guys over the factories in Belgium, and Netherlands, because it's just a beautiful factory and the trucks are performing in terms of their fuel economy, and their driver comfort and conveniences and how they work and safety features.

And there are level two autonomous capabilities. So all of that together as a great benefit to the customers and that's why it will be impactful to our margins.

The invitation accepted.

Sure.

<unk>.

Like Tommy just try it.

On the autonomous trials, not just Fedex, but.

What <unk> done across the board can you just talk about the benefits that you're finding in terms of fuel economy improvements.

Excellent avoidance.

Outside of.

The.

Potential elimination of labor longer term can.

Can you just talk about it.

You had quantified the other benefits that youre seeing in the trials.

That's the real.

Part of the real opportunity of this is as these trucks become mature than they will be very safe and it will bring efficiency to freight thats a huge impact of the country in the world and so we're looking forward to being leaders with that effort and are in that position right. Now. So we'll continue to progress that I think it's hard to quantify.

Those values, but you can intuitively understand how it can be safer and more efficient and good for the the operating environment.

Okay I appreciate the discussion. Thanks, you bet have a good day.

Next question will come from the line of Ross Gilardi from Bank of America. Please proceed with your question.

Yes. Thank you good morning, everybody.

Russ.

I was just wondering if you could comment on the capital spending outlook for next year I mean, it's down by almost $100 million and I'm, just a little surprised by that given the strength of the outlook in all of the production constraints and so forth and just what are your latest thoughts on incremental vertical integration it might pursue will give it given that supply chain situation.

No big changes in vertical integration rules, but we did just complete.

The launch.

The biggest product renewal programs in the history of the company with the new danced a new medium do these the new <unk> 680, and a new 579 so were.

And let's face it you see R&D go up a little bit more as we focus our efforts to autonomous electrification connectivity and those kind of technologies in that space, There's just more R&D going on.

Capital spending will come later.

Okay got it thanks Terry.

And then could you talk a little bit more about Europe.

As your demand outlook for next year is barely up.

And.

It just seems like a lot of backlog.

Globally is getting pushed out further and further so what why is demand outlook not up that much next year are you seeing any areas of softness or are you just taking a conservative approach, yes out of the gate.

Hey, Ross, let me take a swing at that and maybe Harry will add something into it as I would say that it's not a demand feature. It's a demand is extremely strong right now and order backlog is very good.

And it's really a supply issue is still it has a struggling the market. So our market size assumptions are based upon assumptions of what we can get supplied.

And a range of 260 to 300 pounds and at the high end of that range of 300000 truck market for Europe, that's a pretty good market.

So, let's not forget that.

Oh for sure I'm, not I'm not debating that.

Youre coming off the year with pretty significant constraints, where youre still plan a lot of catch up maybe that's more of a production comment than it is retail sales comment but.

That's why I was asking.

Thank you and then just.

Just lastly can you just talk about unions at all I mean, what what percentage of your production workforce globally unionized. These days do you have any union.

Union contract negotiations.

Coming up obviously, that's topical these days around that.

The industry so.

I've been asked that in a while.

Sure.

Very small percentage of our team in North America is unionized and a great relationship with them and those are actually quite positive ways of working with with each other in Europe, It's a union environment.

But the same thing excellent relationships with the unions.

Greenough, one of the things as we travel around and this and this dynamic.

Dynamic environment and go out and meet in the floor with people. It's a great place to work and we have some fantastic people and I couldnt be more proud.

Humbled to get to work with all of them.

Okay, great. Thanks, very much guys.

Your next question will come from the line of Jamie Cook from Credit Suisse. Please proceed with your question Hi.

Hi, Good morning, I guess two questions. One obviously the park's performance. This quarter was very strong I guess it will be throughout the whole year. Do you think there is an opportunity for you guys to outgrow the market on the part side and then I'm just wondering on the margin front, what youre seeing on pricing for parts and is there an opportunity for gross margins in parts can move.

Structurally higher with with share with scale and as some of these investments start to wear off and then just my follow up question is Jeff.

Can you just remind me what you said about production in the fourth quarter North America versus Europe.

So on the parts business, Jamie I would suggest that our teams are doing a fantastic job of playing.

Technology again part of our digital transformation as the team at parts is really leading it and getting data from trucks from customers from the dealers and then synthesizing that into value added services. So just top tier performance. There I think that leads to growth in the business by all of them.

And I think that does present margin opportunities for us in the future as we look out so great job for all of them in that area and then as far as the split of Europe and North America. Your second part of your question I would say that we would expect growth in both markets and you have to remember that in the fourth quarter, we will see more build days in Europe than we had in north in the third quarter rate just by holiday schedules.

Shutdowns, so youll, probably see increases higher at a higher degree in Europe.

Okay, and sorry, just on parks can you talk about what youre seeing from the pricing front I know you talked about 4% price I think that was specific to truck.

Parts has been a little bit higher even than 4%.

Thank you.

About 5% five 5% in the third quarter doing.

Okay, great. Thank you.

Debt.

Your next question will come from the line of Nicole to place from Deutsche Bank. Please proceed with your question.

Yeah. Thanks, guys good morning.

Nicole.

And we've been through a lot here, but I guess, we haven't really talked a whole lot about South America and I noticed that you guys could take up your full year 'twenty one guidance for.

The market there so would love to hear what's going on.

South America.

You bet, we did take the market up a little bit there what we've seen in South America as our dealers are doing a fantastic job down there we have the new <unk> that we introduced last year.

Customers are in love with that truck, it's performing at the top of the Mark. So our premium reputation is established in South America, and Brazil, we've grown in the Andean region as well and so South America is a strong point for <unk> and we've had the strategy to grow there and it's been successful.

Got it thanks, and when we think about like how you guys are booking orders into 2022, I guess, how far out are you booking orders at this point and I know that thats, probably like a bit of a flux with what's going on with the supply chain and how does that compare to what normal at this point in the year.

Well I don't.

Normal is a funny word but.

I would say that in a strong market, which is what I would treat this as a very strong market.

Likely to have significant order backlog a few months of order backlog, we have every bit of that and more and so we're working with the customers now as we fill in the 2022 market, but obviously, it's going to be as we said before constrained by the number of parts. We get so we will see improvement and we're trying to make sure we get all the customers the trucks that they want.

Okay perfect. Thank you I'll pass it on okay great.

Your next question will come from the line of Tim Thein from Citigroup. Please proceed with your question.

Great. Thank you. Good morning. The first question was just on on the parts business and.

Just thinking from a high level the growth potential in 'twenty two.

You talked earlier about the potential for truck sales.

Potentially to run ahead of retail just as you potentially see some dealer stocking.

Do you think there's a similar potential on the part side and I'll, just say that we're just king and hearing more about certain parts being tight.

From from dealers. So is there a potential for sort of a restocking in 'twenty two.

I think the way I think about that is it.

Tons of freight volume out there and people are running their trucks fully right now and so because there is a constraint on new trucks industry wide, it's meaning that the repairs are going up on the trucks that are existing and so that's also creating a great opportunity for the for the parts market and that seems likely to continue into next year.

Okay.

It goes the other way if you do start to see new truck supply.

Maybe that tempers the growth in parts of it yeah.

Yeah, but I wouldn't look at that.

Soon.

Okay, Alright, and then just on the financial services I mean, just such.

A big quarter from a margin percentage basis is there anything here that we should think about.

A lot that runs through that.

Necessarily sees in the face of a release in terms of.

Gains on new sales or changes from the operating lease assumptions or anything.

More.

I guess, one time in nature of that.

Just as we think about similar profitability in the fourth quarter is that fair all else equal if we had a similar strong truck market with with <unk>.

Strong residuals can we kind of run run rate that into 'twenty, two or is there again, just something we should think about that potentially impacts the back half of this year that may not recur next year. Thank you.

Tim the.

Finance company has had a stellar quarter.

Portfolio is of excellent quality customers continue to pay on time past use were less than half a percent.

And on top of that we see strong demand for used trucks. We all the investments we've made in the used truck centers over the years, we get the dividends out of that now.

And you see that back into strong.

Strong profitability of $120 million a record for the finance company.

We expect that performance to continue let's say into next year.

It's difficult to say, what's going to happen in the second half of next year.

For the foreseeable future the finance company in the future is bright.

Alright, very good thank you.

Yes.

Your next question will come from the line of Courtney Jaco bonus from Morgan Stanley. Please proceed with your question.

Hi, good afternoon guys.

If we could just talk a little bit about R&D I know you mentioned the step up that's going to support clean diesel on some of the autonomous programs as well as the connected truck platform hit.

Historically, you've talked about obviously investing.

Mostly in the diesel you've done your new truck launches just curious if the buckets for R&D have changed over time and also as we think about the investments that you're making autonomous versus you know clean diesel anything that you can just help guide us as to where the increase is primarily.

<unk> coming from and how it compares to the breakdown in prior years.

Sure let me take a swing at that for you and then maybe some of that is I would say that there is a shift going on we have a lot of great diesel programs coming along.

But do you think about 2024 missions 2027 emissions our team did a great job of meeting that with clean diesel so that's continuing.

As that will likely be the dominant powertrain offering for the next five to 10 years at least.

And then I would suggest that beyond that we have put more money into the electric vehicle programs as we develop our own capabilities, there and develop our own software solutions and control algorithms and same with autonomous with the autonomous vehicle platform and then the investments we're making in connected services in this digital transformation. So that we are providing value to customers.

<unk> areas all of those are the are the shifts that are ongoing right now as Harry said, we've just completed the best launch of new trucks we.

Our history and so that that foundation is built and we're moving to other areas.

Great. That's helpful. And then just a little bit more on the <unk> margin comments can you just help us understand maybe.

Made the comments about absorption, but just in terms of.

The additional availability reengineered chips and some of the broker chips.

Any guidelines you can give us on just how much more expensive are versus them.

Procuring them through normal channels.

Just how are you thinking about the margin impact that would have to <unk> first just thinking about 2022, when things normalize a little more.

Yes of course, it was alternative chips can be more expensive and often are more expensive, but it doesn't have a material impact on our gross margin percentages for now.

Okay. That's helpful. Thanks.

Your next question will come from the line of Matt Alcott from Cowen. Please proceed with your question.

Good morning. Thank you for taking my question. So you guys are doing a good deal on autonomy front and a good deal on electrification.

Can you talk about if you see an overlap of the two technologies in the girls area.

Electric autonomous trucks, and if there are any manufacturing processes advantages to try and to merge the two technologies or limitations.

I wouldn't think of them quite as linked like that I think that initially autonomy is going to have a great role to play when it becomes commercialized in the long haul market principally to begin with.

And that isn't something that lends itself well to battery electric vehicles, it might with hydrogen fuel cell, which is one of the other technologies, we're leading it. So I think that we look at them as developing in parallel they will emerge at some point, but I don't think that they have to be linked like that.

Got it and then my second question is on the cycle.

I know the base case scenario here, our assumption is that supply chain disruptions you slowly and gradually.

But if they don't if they.

He has more quickly.

Somewhat abruptly.

Are you guys able to ramp up production on a sequential basis next year.

Maybe like a step function material increase.

Yes.

Chip forages are out of the way.

And that indeed, we could we prepared ourselves for it with great operations teams and we would be prepared for that that step up.

Got it. Thank you very much you bet.

Your next question will come from the line of Jeff Kauffman from vertical research. Please proceed with your question.

Thank you very much and congratulations in a tough environment.

I almost feel bad coming back to autonomous, but I think it's just such an interesting opportunity.

So I'd love to ask you two questions on this number one.

Is there going to be any ability for you to utilize the platform across markets. So, let's say Europe, where is the thermometer autonomy out there and what's going on and then the second question you kind of answered a little bit but.

You are building a platform for it so it's not something you are dabbling in I mean, this is something you believe in and Youre going to commit to.

What have you learned so far.

Whether it's the way the trucks, where or what things maybe are you learning that you didn't expect in terms of fuel economy. I know, it's early stages in its early innings, but I'm just kind of curious because you're one of the few companies that's really being proactive in terms of building a platform of testing vehicles.

Bert let me try to take both those questions for you.

As far as the platform just autonomous vehicle platform. We're building indeed, it does have applications Cross markets Cross brand. So we are investing in the knowledge centers and software capabilities.

The vehicle as well as the hardware systems onboard the trucks, so that those integrate well with the autonomous driver, but companies like Aurora that are creating the driver itself integrates well to our platform and then our platform could be used with another autonomous driver as well. So that's why we're making those big investments at all.

Also kind of continue to say that the lessons learned are that the drivers are going to be around for a long time that this is not something that will step in and three years and displace drivers is that this is a gradual introduction it'll be certain routes it'll take weather conditions and those will slowly get sorted out.

So I would say that the other the other key learning is that the support required for an autonomous vehicle is pretty high and having a strong global presence like Packer does up success occur Thomas vehicle operations, because you need a good dealer network you need to be able to understand what's happening onboard the vehicle through connected services and need to be able to reach out and get to.

That truck and work with our customers to make sure that they are operating well and then repair the truck when something happens. So it really is the economy is a great opportunity for <unk> to grow in the world.

Okay. That's fantastic again, congratulations on the quarter and thank you for your answer alright. Thank you very much.

Your next question will come from the line of Felix <unk> from Raymond James. Please proceed with your question.

Hey, good morning, everybody Hello.

Hey, I just wanted to follow up on the comments on the parts business.

Clearly the backdrop just from an industry wide truck utilization standpoint is obviously very favorable today and probably for the foreseeable future.

Just curious if you could talk through some of the company specific drivers in that business and really the sustainability of those through cycles even.

The truck market were to loosen.

I'm trying to think through and.

Engine parts, the ecommerce business TRP at the new distribution center.

And any sort of quantification on those would be would be helpful.

Yes, you made great comments of it to answer your question. Those are all exactly right I mean, the TRP growth is strong we are seeing continued strong growth of 37%.

And the e-commerce business, so that's fantastic.

<unk> business parts are growing as well and then I really think we need to make sure. We emphasize the fact that through the digital transformation that departure teams embarked on and knowing how to connect with the customer with the dealer and then meet those needs. Our parts team is doing a fantastic job of doing that and Thats, what kind of grows the business in the longer term, so really positive things to look forward to.

Got it and then just quickly on the margins they've obviously been strong.

Curious if theres anything in those numbers from a supply chain had one perspective or have you been sort of isolated or covering your cost with that.

Just kind of trying to think of the puts and takes as we head into 2022.

For parts Felix.

It's very easy to whenever there are cost increases.

Two price increases at the same time, there is no backlog for parts.

So the parts orders that come in today theyre going to be shipped today seem to automotive.

It's very easy to get pricing, there or in line or better than the cost increases.

Got it I appreciate Eric.

At this time there are no further questions in queue are there any additional remarks from the company.

We'd like to thank everyone for joining the call and thank you operator.

Yeah.

Ladies and gentlemen, this concludes <unk> earnings call. Thank you for participating you may now disconnect.

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